Norway Oil Rush Turns to Fool’s Gold for Closing Towns

By Josiane Kremer -
Sep 17, 2012

For the town of Glomfjord in
Norway’s Arctic, the country’s oil boom has turned into a curse.

Unemployment has more than doubled, people are moving out,
and schools now risk being shut after solar-energy component
maker Renewable Energy Corp. (REC) ASA closed a 200-person plant in
March before moving production abroad to cut costs.

“It’s an earthquake -- a catastrophe,” said Per Swensen,
the 65-year-old mayor of Meloey, a district of 6,600 people
scattered across 755 islands that includes Glomfjord, in an
interview last month. “It has dramatic consequences.”

Glomfjord and towns like it are victims of a deepening
economic divide sparked by an oil rush that’s transformed Norway
into Europe’s second-largest producer. While the boom has turned
some fishing villages into affluent towns with costs rivaling
Zurich and Tokyo, it has also turned Norway into Europe’s most
expensive place to do business. That’s hobbling the ability of
towns and regions far from Norway’s oil resources to keep up.

“I would like to have a bit more than one leg to stand on
today and in the future,” said Hilde Bjoernland, a professor of
economics at the Norwegian Business School in Oslo. “What we’re
doing now is cutting away at one of the legs.”

Norway’s economy risks becoming flooded by oil more than
four decades after it was discovered 180 miles off Norway’s
southwestern coast in 1969. Average manufacturing labor costs
are about $57.5 an hour, 31 percent more than in Germany and 65
percent more than the U.S, according to the U.S. Labor
Department. Complicating life for exporters, Norway’s krone has
surged 24 percent against a basket of currencies from its
trading partners in the past 3 1/2 years as investors seek an
oil-rich haven from the global financial crisis.

‘Perfect Job’

That’s making it hard for companies outside the oil
industry to evolve and thrive even as the economy expands amid a
contraction in the euro area. Of Norway’s 20 biggest listed
companies, only one non-oil related company, cancer drugmaker
Algeta ASA (ALGETA), has been founded in the past 40 years. Of the
companies, half are either directly involved in oil production
or service the industry with rigs and equipment.

Annett Kildal, an engineer, found herself part of that
trend this year after she lost her job at the REC plant,
Glomfjord’s largest employer at the time.

“People were angry and frustrated,” said Kildal, who last
year bought a home nearby. “The village has 1,100 people. And
now that REC is bankrupt you get even angrier over how it’s
possible in Norway that companies can act like REC.”

She then found a ‘perfect job” in the oil industry 1,300
kilometers south in Bergen. REC’s Norwegian Wafer unit filed for
bankruptcy.

Wealth Fund

To be sure, Norway’s oil boom has transformed the country
into the envy of many. The third-richest nation per capita has
an unemployment rate of less than 3 percent and offers its
citizens free health care and education. It has a lock on the
top spot in the annual United Nations human development index
and has amassed a $640 billion sovereign-wealth fund from its
oil revenue, amounting to $128,000 per inhabitant. The
government limits spending of oil revenue to 4 percent of the
fund, to ease the effects of wealth on the economy.

“We’re sitting on easy street,” said Arne Joakimsen, who
owns 22 restaurants and bars on Norway’s west coast and in the
city of Stavanger, the nation’s oil capital. “I feel we are
very, very lucky.”

Welfare Strains

The oil dividend is nevertheless causing problems for the
welfare state as the cost-of-living climbs across the country.
In Stavanger, a town that has shed its reliance on sardine
cannery and fishing to become a city crammed with expats and
upscale restaurants, local authorities can’t find enough
healthcare workers who can afford to live there.

“We are lacking many specialized nurses,” said Nina
Horpestad, head of the Norwegian Nurses Organization for the
local county, who is trying to fill as many as 40 vacancies.

House prices in Stavanger have tripled since 2000 to 40,000
kroner ($6,740) a square meter as employees from Exxon Mobil
Corp. (XOM), Total SA (FP) and other oil giants pour into the town, according
to the Association of Real Estate Brokers. That compares to
about $8,589 for the top 10 most expensive London areas.

The city is the fifth-most expensive in the world, beating
Geneva and Zurich and coming in 35 spots ahead of Manhattan in
New York, according to an ECA International’s Worldwide Cost of
Living Survey from March. Oslo was the second-most expensive
after Tokyo.

Like Klondike

“One of the biggest challenges for me as a mayor is those
who don’t work in the oil sector,” said Mayor Christine Sagen
Helgoe, 44, who is the granddaughter of the first head of Texaco
in Norway. “They don’t earn that much and it is difficult for
people to be engineers in the municipality or nurses or pre-
school teachers -- that type of personnel -- in a region that
has so many possibilities in the oil industry.”

Ola Steinsnes, the supervisor who oversaw Statoil’s
drilling, said the discovery was reminiscent of the Klondike
gold finds, the last big North American gold rush in the late
1800s.

“It was overwhelming because none of us, even though there
were many that had a lot of experience, had seen such a mighty
core sandstone sample,” said the almost 30-year offshore
veteran in an interview. “There was so much oil running out of
the core that we needed to collect it in bottles.”

The discovery will allow the nation of 5 million people to
delay the eventual end of a 40-year oil era as oil output has
dropped about 50 percent over the past decade because of
dwindling reserves in the North Sea.

Growth Engine

That will help power growth in a country that was mostly
reliant on fishing, mining, shipping and timber for its exports
40 years ago. The mainland economy, which strips out oil and gas
production, has expanded an average 2.6 percent over the past
decade, compared with 1.1 percent in the euro region.

Petroleum production has added more than $1.5 trillion to
Norway’s gross domestic product over the past four decades,
according to the government and an estimated 250,000 people work
in jobs directly or indirectly linked to the oil industry,
according to the Finance Ministry.

Credit default swaps also show Norway is the least likely
to default on its sovereign debt. The country’s five-year CDS
traded at about 21 basis points, more than 50 percent below
Germany’s 48 basis points. Credit default swaps allow traders to
bet on the probability of a debt default.

The Warning

At the same time, the oil largesse prompted a warning
earlier this year from Norway’s central bank Governor Oeystein Olsen, who helped design a fiscal rule while at the Finance
Ministry early last decade.

Olsen says that the government can now deploy so much money
from the oil reserve that other parts of the economy will get
strangled.

The governor warned in February of the loss of “entire
industries” and called for the spending limit to be cut to 3
percent of the fund’s value to ease pressure on the economy.
Spending risks “crowding out exposed sectors,” Olsen said.

Excluding oil revenue, Norway has run a deficit every year
since at least 1980, according to budget reports. The
structural, trended deficit, a measure of how much oil income is
used to plug shortfalls, is estimated to reach 5.2 percent of
mainland gross domestic product, which excludes oil and gas
output, this year.

In Meloey, the mayor is now counting the people moving
away and dreading the lost revenue. About 50 people had moved
as of July 1, he said.

“We hope to prevent as many as possible from moving away
and get them into jobs here, but if that many leave then our
finances will not allow us to have so many schools and such a
decentralized community,” he said.